Broken Relationships by Broken Agreements

Negotiating equitable contracts for software and technology services can be a difficult process. From the moment you engage with a prospective vendor, the contract negotiation game begins. The blatant reality is that vendors negotiate agreements frequently while most organizations do not, thus giving them leverage over the process. Adding to potential inequity is the fact the agreements are originally constructed by the vendor’s counsel, and they are not necessarily meant to be balanced in who they protect. While it would be nice to get the deal you deserve, you will get the deal you negotiate.  

Technology agreements must be looked at as advanced pre-nuptial contracts. Think about it. You’re about to embark on a partnership that may last more than ten years, and this agreement is the only device that defines how that relationship will work. The contract should have the right terms included to protect both parties. The vendor is certainly going to make sure they are protecting themselves. Thus, the question therein lies, “does your team have the expertise to protect itself”? 

Vendor and software agreements can set the stage for the “marriage” with a supplier that will largely dictate how flexible, productive, and efficient your organization is for many years to come. In other words, their digital tools and professional services are critical for you to build the technology foundation that runs your business. This naturally creates a tension in your “marriage” because you need them, and they need your business. To get your business, they may “tilt into the wind”, promising things they do not have or cannot deliver on schedule. Adding to the frustration of this situation is that the relationship is forced to extend and renew, simply because you’ve invested so much time, money, and possibly customization that you can’t afford to rip and replace, even though you’ve grown to distrust the vendor and detest its service. 

However, there is an ethical imperative on both sides. Just like any relationship, both parties must treat the other with respect and with high ethical standards. Sadly, there are many situations where the client is as much at fault as the vendor: no agreements, poor contract terms, weak specifications, constant scope creep, poor internal project management, failure to dedicate time resources to projects, etc. 

“All broken relationships can be traced back to broken agreements.”

Stephen Covey

What has been missing for many organizations is a consistent and governed approach to building great technology vendor relationships that are cost effective, controllable, and beneficial. A healthy relationship is possible if your organization builds a process to get there. When negotiating agreements there is always leverage on one side or the other.  This can change based on the timing of a vendor selection process, the time of year, the newness of the application to the market, and many other factors. It is important to maximize your leverage, and to follow a consistent process for getting your terms into the agreement. WHO is negotiating is also key.   

Negotiating Team

It is important to be intentional about who is on your negotiating team and what each person’s role will be. It goes without saying that the people who are going to be responsible for negotiating with a vendor should have the skills, mentality, and experience to do so. This is not a type of transaction to delegate to just anyone because the consequences of poor negotiation are severe.  

The size and makeup of the team can vary depending on the scale of the negotiation. If the dollar amount involved is low, it might be appropriate to have one person handle the entire transaction. As the cost and size of the technology product grows, the size of your team should also expand.  

Be strategic about who does what on your side, and who you are working with on the other side. A technologist is needed to provide the engineering oversight.  The business lead provides the functionality, budget, and timing input.  The organization’s general counsel helps with the terms and negotiation. Project managers help with the commitments on execution.  A consulting firm might help with contracting and terms and could play the “bad cop” role. 

Contracting Documents

In order to create a mutually beneficial contract, you must understand the type of documents that are used and what they are used for. There are generally three levels of agreements between two parties in a technology arrangement:  

1. A Master Services Agreement (MSA) typically states that a provider will provide services and includes the legal terms and conditions under which the work will be completed. This is the governing body of the contract where all terms are defined upfront. This is where your legal team will want to spend a significant amount of time reviewing and modifying as needed to insure the contract complies with your state and local laws (e.g., data privacy and security). 
2. A Statement of Work (SOW) typically states what will be provided in a given instance or instances and is subordinate (except where explicitly stated as not) to the MSA. This essentially is the solution of the service that they are going to provide you. From detailed pricing and licensing to integrations and implementation, if this is not accurately documented or fully understood by your negotiation team, the relationship will quickly begin to see turbulence from the beginning. 
3. A Service Level Agreement (SLA) typically states how the services listed in the MSA or SOW(s) will be provided on an on-going basis. This is where your vendors support shows its true colors in respect to provide high quality service and supports your needs of the relationship. Very little can be done about poor service when there is no definition of what good service is. Reasonable objectives should be set that describe items such as response times, availability, problem resolution and accuracy. The supplier and customer should commit to a mutually acceptable means of verifying compliance with service objectives and agree on actions that must take place (normally via escalation of the problem to the supplier’s upper management) when exceptions occur. 

These three documents must be looked at collectively as one agreement in order to ensure that there are no loopholes that may work against your favor when issues arise. Having your negotiation team assigned to the appropriate areas within each document will require your team to be in step with its communication and collaboration process. 

You will only get one chance to put together a fair and healthy agreement. If you are sloppy with your process, you will introduce a high amount of risk into the relationship. The danger is not just the amount of time and money you can lose from allowing a vendor to take advantage of you, it is also opportunity costs you pay from not having the software platform up and running as you imagined or needed. For this reason, it is worth your time and energy to manage the contracting and vendor relationship building very carefully. 

Based on years of experience, FPOV has developed a systematic approach to improve the Vendor Relationship and Contracting Process. Technology vendor selection and contracting is becoming increasingly important as we work to integrate more and more technology tools into the way we perform and deliver our services to constituents. The contracting and negotiation process is vital to establishing the right foundation for a healthy working relationship, so having a systematic approach to promote consistently well thought out contracts based on best practices is an important step.  

The materials we provide include a combination of guidelines, such as a step by step process approach, checklists to make sure you don’t miss important details, and some sample legal language. The sample legal language is not intended to replace the advice of your legal counsel. However, it may be a time-saving starting point in some cases for terms or clauses that you may want to include in your contracts but likely will not see in the first version of an agreement that a vendor sends you.